How a big SUV and a home office can cut your tax bill

BillBischoff

New and pre-owned “heavy” SUVs, pickups and vans used over 50% of the time for business are eligible for the IRS’s Section 179 depreciation write-off in the year they are first put into business use. The Section 179 deduction will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state income-tax deduction too. Setting up a business office in your home can help you collect additional tax savings. Here’s what you need to know about the benefits of combining these two tax breaks.

First, pick out a suitably heavy machine

The Section 179 deduction deal applies to a wide range of “business property.” But when it comes to vehicles, the really big deduction is only available for an SUV, pickup or van with a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds that is purchased (not leased). First-year depreciation deductions for lighter vehicles are subject to skimpy limits of a little over $3,000—just a fraction of what a bigger vehicle can get.

It’s easy to find attractive vehicles with GVWRs above the magic 6,000 pound threshold. Examples include the Audi A7, BMW X5 and X6, Buick Enclave, Cadillac Escalade, Chevy Tahoe, Dodge Durango, Jeep Grand Cherokee, Nissan Titan, Toyota Tundra, Ram pickups, and most other full-size pickups. You can usually find the GVWR on a label on the inside edge of the driver’s side door.

Then play the home office angle

As I said earlier, the tax-saving Section 179 deduction is only allowed if you use your heavy SUV, pickup or van over 50% of the time for business. (The business-use percentage is calculated by dividing business use mileage by total mileage for the year.)

Shutterstock.com / Darren Brode

The Cadillac Escalade is one of many SUVs above the magic 6,000 pound threshold.

Sometimes the over-50%-business-use test is difficult to pass. But you’re much more likely to pass if you have an office in your home that qualifies as a principal place of business. Then, all the commuting mileage from your home office to temporary work locations such as client sites is considered business mileage. Ditto for commuting mileage between your home office and any other regular place of business, like another office you keep downtown. You can also treat all mileage between your other regular place of business (that downtown office) and temporary work locations as business mileage. (Source: IRS Revenue Ruling 99-7.) The point is, when your home office qualifies as a principal place of business, you can easily rack up plenty of business miles just running around, which makes it that much easier to pass the over-50%-business-use test for your heavy vehicle.

More business mileage also means a bigger Section 179 deduction. For example, a $50,000 heavy SUV used 100% for business in 2014 generally means first-year depreciation deductions of at least $30,000 ($25,000 from the Section 179 deduction plus another $5,000 of “regular” depreciation). In contrast, 70% business use would generally cut your first-year deductions to only $21,000 (70% x $30,000).

Last but not least, allowable home office expenses count as business deductions that will reduce your federal income tax bill and your self-employment and state income tax bills, if applicable.

How to make your home office a principal place of business

Our beloved Internal Revenue Code gives self-employed individuals (sole proprietors, partners, and LLC members) two different ways to qualify a home office as a principal place of business.

First way: You conduct most of your income-earning activities in the home office.

Second way: You conduct your administrative and management functions in the home office. However, to take advantage of this qualification rule, you cannot make substantial use of any other fixed location (like another office downtown) for administrative and management chores.

If you are an employee of your own corporation, your home office write-offs are treated as miscellaneous itemized deductions that can only be written off to the extent they exceed 2% of your adjusted gross income.

In any case, you must use the home office space regularly and exclusively for business purposes during the whole year. Exclusively means no personal use at any time, so you might have to wait until next year to set up your deductible home office and buy your heavy SUV, pickup or van. No problem. That gives you more time to shop around for the right vehicle.

The bottom line

You can potentially mate the Section 179 first-year depreciation break for heavy business vehicles with the home office deduction privilege and reap major tax savings. If you feel guilty about buying a gas guzzler, console yourself by thinking about the taxes you saved.

Open issues and caveats

It is highly likely that Congress will increase the maximum Section 179 deduction for tax years beginning in 2014 from the current $25,000 to $500,000. However, the maximum allowance for heavy SUVs and heavy short-bed pickups will probably remain at $25,000. Heavy long-bed pickups and most heavy vans would be eligible for the $500,000 maximum, which means many small businesses would be able to write off 100% of the business portion of the cost of such vehicles in 2014.

It is also highly likely that Congress will restore the 50% first year bonus depreciation break for new (not used) heavy vehicles placed in service in 2014. If that happens, total first-year depreciation write-offs for new heavy SUVs and short-bed pickups would be dramatically increased, because you could stack the 50% bonus depreciation deduction on top of the $25,000 Section 179 deduction.

Warning: Your Section 179 deduction cannot exceed your aggregate net business taxable income (calculated before the Section 179 write-off). However, if you operate as a sole proprietorship, or as a single-member LLC treated as a sole proprietorship for tax purposes, you can count any wages that you earn as an employee as additional business income. If you’re married and file jointly, you can also count your spouse’s earnings from employment as well as any self-employment income. These loopholes reduce the odds that you’ll be hurt by the net business income limitation.

Warning: If you operate as a partnership, multi-member LLC or corporation, special rules apply. So consult your tax adviser about how to take full advantage of the depreciation breaks for heavy business vehicles and how the home office deduction angle works in your situation.

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